Return to Winter: Russia, China, and the New Cold War Against America (30 page)

Meanwhile, privatized Russian oil companies, such as LUKOIL, began expanding internationally beginning in the 1990s.
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Gazprom, Russia’s state-owned gas giant, expanded into Europe to gain influence in Eastern Europe, especially over former Soviet republics. In June 2013, Gazprom signed an agreement to explore possibilities for extending the Nord Stream gas pipeline with GDF Suez. If the project goes through, two new pipelines will run through the Baltic Sea, and the extended arm would reach the UK. The capacity of the twin pipelines would be 55 billion cubic meters.
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And yet despite its potency, Russia’s energy industry—and with it, its national economy—faces serious obstacles. A number of factors now work against Moscow’s energy dominance, and these obstacles
are contributing to Russian volatility, aggressiveness, and unpredictability on the world stage.

Energy: Russia’s Trump Card and Potential Downfall

In 2007, at its annual corporate meeting, Gazprom served red and black caviar. Back then, the firm boasted a market value of $360 billion, and its chairman, Alexey Miller, promised that it would someday reach $1 trillion as it became the world’s biggest company. The Russian economy was growing 7 percent year over year.
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Gazprom played hardball with its customers in Eastern Europe, Ukraine, Bulgaria, and elsewhere, setting high prices, spurning negotiations, and even cutting off supplies when disputes could not be settled in timely fashion. Moscow shut off Ukraine’s supplies in 2006 and 2009 during contract and payment disputes, and it has continued to exploit Ukraine’s dependency on Russian gas, pressuring it to pay down its $2.2 billion fuel debt.
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Bulgaria fell victim to the 2009 shutoff as well. Moscow’s hardball tactics left Bulgarians freezing in the dead of winter for days until a new agreement could be reached. Observers saw Gazprom as an instrument of Kremlin foreign policy; Vice President Dick Cheney even accused Russia of using gas for “intimidation or blackmail” in 2006.
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The landscape has changed radically since then. Gazprom has lost more than $280 billion since 2008.
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Today, the energy giant is worth all of $94 billion—a 74 percent drop in six years.
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The Russian economy has declined along with it, seeing its quarterly GDP growth plunge to 1.2 percent in the second quarter of 2013.

Three factors combined to halt the Russian gas-powered economic boom: the financial crisis, which wiped out trillions in wealth and wrought havoc on economies worldwide; the Russian overreliance on energy for economic growth; and the shale-gas revolution, especially in the United States. While the crisis itself has mostly passed, its effects
are still being felt, and Russia and its energy economy, while still strong, have not regained the massive leverage they enjoyed before the crash, especially because oil prices have not approached the highs of those heady days. Still, though weakened, the energy industry remains the linchpin of the Russian economy.

Hydrocarbons drove more than half of Russia’s GDP growth from 2000 to 2008.
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But even since then, the country’s reliance on energy has shown little sign of easing, despite efforts to stimulate a Russian technology industry and revive a once-powerful manufacturing sector. Even as late as 2012, oil and gas made up about 70 percent of the country’s exports—17 percent of Russian GDP. Gazprom makes up almost 15 percent of the total capitalization of the Russian stock market. That dependence could spell future trouble for Russia, especially since the nation’s reserves may sustain current production levels for only another 20 years. Shoring them up would require exploration of the untapped reserves in the Arctic and eastern Siberia, a massively expensive undertaking.
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Finally, the shale revolution threatens Russia’s future economic prosperity and many of Putin’s political goals. The advent of fracking—in which water, along with sand and chemicals, is injected into shale-rock formations to extract gas—has changed the energy economy dramatically. Gazprom head Miller dismissed fracking as “a myth” in 2010; more recently, he dismissed it as “a bubble that will burst very soon,” adding: “We don’t see any risks to us at all.”
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But Miller is way wrong: Fracking is the real deal. In the United States, it has transformed North Dakota into a boom state. A decade ago, the United States eyed the goal of “energy independence” as a pie-in-the-sky aspiration. Now, the United States has leapfrogged over Russia to become the world’s top gas producer, and analysts project that the U.S. will achieve energy independence within 20 years, perhaps sooner.

Outside the United States, fracking is changing the international economy by cutting into Russia’s share of the gas market in Europe.
Because America now supplies more of its own gas, the U.S. has been buying less liquefied natural gas (LNG) from Qatar, the world’s largest LNG exporter. The Europeans have been buying more LNG from Qatar—and less from Russia and Gazprom, which supplies about 25 percent of Europe’s gas. But in 2012, Gazprom’s exports to Europe were down 8 percent, to their lowest level in a decade. Further, the abundance of American gas led U.S. companies to shift from coal to gas for their energy needs, freeing up more American coal for European markets. Between the LNG from Qatar and the coal from the U.S., the Europeans had more options. Not only can they buy less Russian gas; they can also bargain for what they pay for it. And countries within Gazprom’s stronghold (Lithuania, Poland, Ukraine) are all developing shale-energy capabilities of their own.
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Gazprom, notorious for forcing brutal pricing agreements on its customers, has no choice but to back off. Already, it has given German and Italian firms retroactive price cuts, and it’s under pressure from all sides to adopt more spot-market pricing instead of pegging its prices to the cost of oil. And the European Union is investigating the company for anticompetitive behavior and unfair pricing practices. Perhaps the best example of how much the climate has changed for Russian energy is this: Bulgaria, which had been left freezing in 2009, recently renegotiated its contract with Gazprom, securing a 20 percent pricing cut.
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Putin’s aggression against Ukraine gives the Europeans even more reason to look for alternatives to Russian gas, though it remains to be seen whether, when push comes to shove, Europe will really stand up to Russia in this way.

All of this puts pressure on Putin to modernize and reform the Russian economy and its political system, over which he exercises iron-fisted control. Russia may open up its gas industry to companies other than Gazprom to foster competition and efficiency. But ultimately the challenge facing Putin is twofold: to regain Russia’s energy momentum while also finding a way to diversify the economy beyond energy. “The
country needs to make huge infrastructure investments in the east and to expand non-energy sectors where Russia has real potential, such as information technology, airplanes, helicopters, engines, turbines, and industrial pumps and compressors,” wrote Brian Bremner for
Bloomberg Businessweek
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But political and economic reform may weaken Putin’s grip on power.

The new climate has also motivated Putin to press aggressively to expand the Customs Union of Belarus, Kazakhstan, and Russia, an economic alliance launched in 2010 and intended by Moscow to rival the European Union. Putin wants the current grouping to expand into a new Eurasian Union, which would include Kyrgyzstan, Tajikistan, Armenia, and other nations. Further, this new union, as Putin conceives it, would operate exclusively; that is, no states could be co-members in the EU. When Armenia showed signs of wanting to sign up with the Europeans, Putin threatened them with increased arms shipments to its foe Azerbaijan—and the Armenians backed down and joined the Customs Union. Russia has applied similar pressure to Moldova, which has been considering whether to join the EU rather than the Customs Union. Moldova remains dependent on Russian gas, and Russian Deputy Premier Dmitri Rogozin reminded Moldovans of this after he met with Moldovan Prime Minister Iurie Leanca in September 2013: “Energy supplies are important in the run-up to winter,” Rogozin said. “I hope you won’t freeze.”
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But the Moldovans have resisted the pressure so far, faring better than their Ukrainian neighbors. It’s worth remembering how, before Ukraine was plunged into crisis, Putin used energy to strong-arm then-President Viktor Yanukovych, who once proudly proclaimed that “Ukraine’s European aspirations are the main pillar of the country’s development.” But after Putin pulled out all the stops, threatening gas shutoffs and an end to the two nations’ “special trading partnership,” Yanukovych abandoned his European dream in favor of a place in the
Russian circle of influence.
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Yanukovych’s capitulation was quickly followed by the implementation of draconian laws that strip Ukrainians of their rights to free speech and assembly.
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That, in turn, helped precipitate the street protests and political movement that led to his ouster—and Russia’s subsequent move to seize Crimea.

Ruthless and antidemocratic as many of his efforts are, the picture that emerges of Putin is of a leader who recognizes Russia’s challenges and is determined to shore up its weaknesses, economic and otherwise. Given Putin’s approach to power and his nationalistic ambitions, economic adversity only increases Russian authoritarianism at home—as his clamp-down against protests, persecution of gays, and other repressive measures have shown—and its belligerence internationally. The tough, provocative Russian leader that American leaders have confronted in recent years can be likened to the proverbial cornered bear: dangerous when wounded.

AXIS TOGETHER: RUSSIA AND CHINA’S STRATEGIC ECONOMIC PARTNERSHIP

Russia and China have also forged a growing economic partnership. China’s need for Russia’s oil and gas is almost a matter of national security; Russia needs to diversify its economy, especially toward the Asia-Pacific region, and thus welcomes Chinese investment in its Far East. At the same time, Russia makes a convenient and ideologically aligned trading partner for China. To this end, in February 2013, cash-strapped Russian oil company Rosneft, controlled by the Kremlin, turned to state-owned China National Petroleum Corporation (CNPC) and proposed to borrow up to $30 billion in exchange for doubling its oil supplies to Beijing.
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The deal, completed in March, has Rosneft agreeing to increase oil deliveries to CNPC to 31 million tons a year, over 25 years, while obtaining $2 billion from China.
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Rosneft, now the world’s largest listed oil producer, already supplies 15 million tons a year to China based on a 2009 deal. The new deal came on the heels
of the $800 million Russo-Chinese oil-for-loan agreement, signed in 2008, in which the two nations agreed to build a trans-Siberian pipeline. In that deal, Russia agreed to send China 300,000 barrels of oil per day for 15 years in exchange for a loan to help Rosneft acquire OAO Yukos, then the largest Russian oil company.
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“Oil and gas pipelines have become the veins connecting the two countries in a new century,” Xi said during his March 2013 trip to Moscow, in which he made the case for stronger economic cooperation between the two nations.
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Picking up the momentum from Rosneft’s oil-for-loan deal, gas giant Gazprom entered into an understanding in March 2013 with CNPC to deliver natural gas to its neighbor via a new pipeline—in return for a loan that will make China the company’s biggest customer by 2018. The deal stipulates that Gazprom will deliver 38 billion cubic meters a year to China via a new pipeline from Siberia starting in 2018. To put the dimensions of this deal in perspective: Germany, long the largest consumer of Russian gas, imported 33 billion cubic meters last year.
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Indeed, the geopolitical ramifications of these deals are immense: Beijing can lessen its dependence on oil coming through the Malacca and Hormuz Straits, two vulnerable shipping bottlenecks, while industrializing areas of the country left behind during its economic boom. At the same time, Russia receives a much-needed infusion of capital. Beyond the economic benefits, these enormous new business deals between Russia and China send a signal to the West that the Axis’s deepening political alliance also has a robust economic component. This signal also extends to the broader world of international finance.

A New Banking Model? The Challenge of the BRICS

“Up until now, it has been a loose arrangement of five countries meeting once a year. It’s going to be the first real institution we have seen.”
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So said Abdullah Verachia, director of the Frontier Advisory Group, in
reaction to the news that the BRICS—Brazil, Russia, India, China, and South Africa—would form a new development bank, a direct challenge to the dominance of the World Bank and the International Monetary Fund. Meeting in Durban in March 2013, leaders from the five growing economic powers agreed that the new bank would focus on infrastructure and development in emerging markets and pool foreign reserves as a bulwark against currency crises.

“We have decided to enter formal negotiations to establish a BRICS-led new development bank based on our own considerable infrastructure needs, which amount to around $4.5 trillion over the next five years,” said South African president Jacob Zuma, adding that the alternative bank planned to cooperate with other emerging markets and developing countries in the future.
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The group’s finance ministers have yet to settle on how much capital the bank would have—perhaps $50 billion—as well as its structure, the role of its shareholders, and its location. Yet there was a “great sense of urgency to establish the entity as soon as possible,” according to Pravin Gordhan, South Africa’s finance minister. “An observation that many of us would make as developing countries is that the roots of the IMF and World Bank still lie in the post–World War II environment,” Gordhan said. “The reforms that have been undertaken so far . . . are inadequate in terms of reflecting current economic and other realities around the world.”
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